Angelides, The Audit, and Unfair Lending

An ex-regulator's testimony to the commission needs examining

Comptroller of The Audit Dean Starkman spent three months last year poring over nearly a decade of financial-press archives to put together “Power Problem,” a CJR cover story that examined coverage in the years leading up to the crisis.

A PDF download of the original CJR “Power Problem” story can be purchased from CJR by clicking here:

Phil Angelides, who heads the Financial Crisis Inquiry Commission, cited it last week in questions to John Dugan and John D. Hawke Jr., respectively the Comptroller and the ex-Comptroller of the Currency:

So, but when you see I think 26 states actively trying to deal with this because they saw an on-the-ground problem — there’s a fascinating article you may or may not have seen from the Columbia Journalism Review about whether the press saw the coming financial crisis.

The only reason I mention it is there’s a piece of the article that talks about how much press coverage there was from 2000 to 2003 as states were actively trying to fight deceptive, unfair lending across the country, the boiler rooms, the aggressive lending.

I guess I would in a question probably pose to both of you, given the ground reality that you had state officials all over the country concerned about the level of unfair, deceptive lending, I’m going to ask you both to consider what might have been deficient, therefore, in national — in national enforcement that would have led them to believe it was such a matter of paramount concern.

Angelides was referring to the story’s point that forthright press coverage and uncompromised regulation produced a virtuous cycle of reform that helped to police the worst lenders at a time when the mortgage frenzy could have been contained. (The converse was also true, unfortunately; when regulation folded its tent, so, too, did the press.)

Here’s what Hawke, who implemented the ought-to-be-infamous rule in 2003 that pre-empted state regulations of national banks in favor of (weaker, typically) federal rules, said in response (emphasis mine):

Well, I should say, Mr. Chairman, that we asked state law enforcement officials on many occasions to refer to us any evidence that they had or any incidents they had of national banks involved in conduct of the sort that you described. And we got zero. And we asked consumer groups for the same thing.

That would be, how do you say… false. I went to the tape. The record shows states all but begged Hawke’s OCC to take on abusive lenders or allow states to do it to themselves. The OCC first preempted the states, then sat on its hands, effectively running interference for its regulated institutions.

Perhaps the greatest frustration is that some federal regulators were working side by side with the industry to push aside state laws or enforcement efforts to address the sorts of abusive or unsustainable lending we were experiencing at the local level. It seemed outrageous to us that a regulatory agency could preempt these laws without any clear authority.

I asked Ryan today about Hawke’s comments. He says he “would strongly disagree” with them:

“That statement doesn’t reflect what we experienced,” Ryan says. “There were tons of consumer complaints referred to the OCC by the states. I was regularly hearing from state regulators that sending complaints to the OCC was equivalent to a black hole. This resulted in the GAO conducting a study on the matter. The agreement they sent the states was not meant to be cooperative. It required the states to say ‘we surrender, we have no authority’. Their focus was not on cracking down on lending practices but rather facilitating the subprime business model of the biggest banks. The actions of the OCC weren’t meant to create a cooperative atmosphere.”

When state investigators spotted questionable loan practices, the feds rejected their help and informed the state that it had no business looking into the affairs of federally chartered institutions. Scott Jarvis, director of the Washington state Department of Financial Institutions, said his files are full of letters from federal bank regulators, bankers and other lenders politely telling his office to take a hike.

In a typical case in late 2002, state bank examiners believed National City Mortgage was violating the state’s Consumer Loan Act by charging extra fees on mortgages, said Kwadwo Boateng, the state’s chief bank examiner. When asked to explain the costly “discount loan fees, underwriting fees, processing fees and marketing fees,” National City Mortgage sought intervention from federal regulators, records show.

The investigation was stopped by federal decree.

At the company’s request, Julie Williams, general counsel of the federal Office of the Comptroller of the Currency, wrote National City a letter in January 2003 saying the state had no right to examine or even visit its offices. Because National City’s parent bank in Cleveland was chartered with the OCC, the federal agency pre-empted the state’s authority. National City attached Williams’ letter to a missive to the state in February 2003, asking state investigators to stay away.

And here’s the kicker. The federal agency didn’t go after the mortgage fee complaint because it had no authority to enforce state consumer protection laws, Boateng said.

Federal regulators, meanwhile, have tended to focus more on the solvency of the institutions they oversee and less on individual consumer complaints. The case of Dorothy Smith, a 67-year-old from East St. Louis, Ill., illustrates how hard it was for individuals to get regulators’ help. In 2001, Ms. Smith, living on $540 a month in government benefits, was encouraged by a contractor to apply for a loan to finance home repairs. After two loan applications were rejected, a broker submitted a third showing that she had monthly income of $1,499 and was employed at a senior-citizens home though she had actually retired 10 years before, she said. The $36,000 mortgage that First Union National Bank (now part of Wachovia Corp.) approved for her required a monthly payment of $360.33 for 15 years followed by a “balloon” payment — when she would be over 80 — of $30, 981.48. Fees and closing costs came to $3,431.

When the contractor left work unfinished, Ms. Smith sought help from Land of Lincoln Legal Assistance Foundation, which complained to Illinois bank regulators. The legal aid lawyers say the loan required unreasonably high payments given Ms. Smith’s income and a balloon payment when she would be over 80 years old. The state forwarded her complaint to the OCC, First Union’s regulator, which responded in 2002: “We cannot intercede in a private party situation regarding the interpretation or enforcement of her contract … . The OCC can provide no further assistance.”

Here’s something from a great 2002 Wall Street Journal leder by Jess Bravin and Paul Beckett headlined “Friendly Watchdog: Federal Regulator Often Helps Banks Fighting Consumers —- Dependent on Lenders’ Fees, OCC Takes Their Side Against Local, State Laws —- Defending Uniform Rules.” It shows how Hawke’s OCC actively fought against holding banks to account for their deceptive lending practices, even after complaints by what I think you could fairly call a “consumer group”:

In the FleetBoston case, the OCC received hundreds of letters from customers in 2000, complaining that the federally chartered bank had increased interest rates on its credit cards after allegedly promising a “fixed” rate. In response, the OCC sent customers letters saying it couldn’t help. Federal law “recognizes banks’ ability to change the terms of credit card account agreements,” as long as the change is disclosed, the OCC said in a typical letter sent to a complaining customer on March 23, 2000. “If you wish to pursue further remedy to your complaint, we can only suggest that you contact private legal counsel regarding any additional remedies,” the OCC added.

In October 2000, several customers filed suit, seeking class-action status and accusing FleetBoston of deceptive practices under Rhode Island state law. A Rhode Island state judge in Providence ruled in April that the case could proceed. But the OCC stepped in to help FleetBoston. The OCC argued in a friend-of-the-court brief that the state law on which the suit was based doesn’t apply to FleetBoston because the OCC can take action against unfair and deceptive practices, as it did in the Providian case — although the agency hadn’t done so regarding FleetBoston.

Here’s the American Banker in 2004:

A host of predatory practices — including equity stripping, loan-flipping, and insurance packing — have become part of the consumer finance lexicon. Industry advocates and the OCC have argued that these abuses are perpetrated by nondepository lenders, not banks. But some disagree.

“That is absolutely, 100% incorrect,” said Tom Methvin, the managing shareholder of the Montgomery, Ala. class action law firm Beasley, Allen, Crow, Methvin, Portis & Miles PC. “The depositories own the finance companies that are doing it all.”

Predatory lending has reached “epidemic proportions,” Mr. Methvin said. “Many times banks make loans to people who do not demonstrate the ability to repay, knowing they can come take the collateral and just sell it to someone else.”

This took me all of an hour and a half to find. It’s worth noting that Hawke was under oath. I have a request for comment out to Hawke, now a partner at Arnold & Porter LLP, where he “provides US and international financial institution clients with comprehensive regulatory, litigation, and transactional services.” Also: “The practice group is recognized for developing innovative structures and novel solutions to regulatory issues.”

The rest of the press ought to ask him for comment, too.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.

Don't Miss

In June 2003, the San Francisco company Linden Labs launched a Massively Multiplayer Online Role Playing Game called Second Life. It quickly grew to over a million users, and has become a touchstone for the potential social adoption...